The Fix is In

We finally know what's been cooking behind the walls at the Federal Reserve. After weeks of speculation, the number's out - and I think Ben Bernanke nailed it.

Of course there are those who will say that QE 2.0 should have been bigger, that $600 billion isn't enough. And some will say that even $100,000 is too much. But right now the market likes the decision.

After the announcement yesterday, volatility spiked briefly and volume picked up - but by the time the session ended all the major markets closed moderately higher.

No major selloff - no huge rally.

Sort of anti-climactic, or was it? At the end of the day, we don't want the Fed's actions to be the only thing driving the market. More important is the actual financial performance of companies, their ability to generate revenue growth, keep costs in check, and deliver goods and services that satisfy demand.

The Fed's $600 billion Treasury purchasing program will certainly help by keeping long-term interest rates low, but it's not going to fundamentally alter supply and demand relationships today.

***However, the purchasing program could fundamentally alter the cost of capital for many companies. With the Fed's buying program, interest rates should stay low (alternative arguments such as this one from Pragmatic Capitalism present compelling arguments to the contrary), meaning that it will continue to be cheap for companies to borrow money. Access to low cost credit should encourage business investment, which should spur growth, and growth should help lift the economy continue to move away from the brink of recession.

***The Fed's QE program essentially puts a floor under asset prices. One of the big asset classes is housing. I've discussed before the importance of a recovery in housing if the economy is going to grow - now we're seeing that the Fed has housing in its crosshairs.

Lower interest rates will help decrease housing inventory by making is more affordable for people to buy homes - and also help those who have second and third homes that they need to get rid of.

A way to play the Fed's easing program is to buy housing and housing related stocks. The obvious choices are Home Depot HD, Lowe's LOW, and Lumber Liquidators LL. I discussed the latter on Monday, but after hearing the company's earnings I'm pulling my recommendation. Lumber Liquidators earned $0.15 per share in the third quarter vs. expectations of $0.32 and shares are getting slaughtered today. I haven't yet had a chance to dig into the details, but would stay away from this one for the moment.

Regardless of Lumber Liquidator's recent performance, housing related trades are one way to play the Fed's program. Housing is a beaten down sector, and successful contrarian investors are now adding exposure.

Contrarian investors get greedy when others are fearful. I just added a housing related stock to the Small Cap Investor PRO portfolio in September, and subscribers are up 15 percent. The company just reported, and the stock responded with at nearly 10 percent surge on that day alone.

I believe the stock's upside potential far outweighs the downside risk at this point. Soon more investors will realize that this company isn't completely dependent on a housing recovery. Instead, growth will come from selling energy technology and adding value to low cost energy sources like coal.

If you're comfortable being "greedy when others are fearful" then I encourage you to click here to learn more about this housing stock and receive a trial subscription to Small Cap Investor PRO.